Operating Expenses 101

by Olga Hallstedt on 6/5/2015 in business

Whether you are leasing, own your building/space, or trying to lease space, here are a few concepts and ideas to REDUCE expenses!

Operating Expenses sound like a very minuscule topic. But, Operating Expenses, NNN, CAM are loosely synonymous and typically about one-third of your overall building expenses!

Building Operating Expenses consist of many billings, primarily:
*Real Estate Taxes
*Insurance
*Utilities
*Maintenance & Repair
*Lawn Care
*Snow Removal
*Cleaning of Common Areas
*Security
*Management Fees
*Miscellaneous

Below are collaborative insights regarding ongoing operating expenses.

Real Estate Taxes
Typically the lion’s share of expenses. Most companies have seen a decrease in this area for the past three years. If not, questions need to be asked. Your Realtor can assist with the necessary information. Reductions in taxes start by being armed with accurate information of local sales comparisons (comps) and taxes for similar buildings in the area. An additional method determinant is on a cash-flow basis (net rental rates). With accurate information in hand, a meeting between the property owner and tax assessor is in order. Example: in two different local municipalities, I identified and assisted with information on a 65,000 sq. ft. building which resulted in a 40% tax reduction and another office building resulted in a 50% tax reduction without having to hire an attorney or go to the Michigan Tax Tribunal.

Since upcoming taxes are based on historical information and data, be sure to meet the assessor prior to the new calendar year when they set budgets and parameters for the upcoming year.

Insurance
Shop this approximately every 2-3 years. In the usual exercise of auditing expenses, a management company out of Holland, MI managed one property of 80,000 sq. ft. and was able to save the owner 40% of the building insurance expense with like coverage. Please note that shopping every year may be excessive since insurance companies may find this unfavorable, similar to credit inquiries. It raises questions.

Utilities
Install programmable thermostats. Steady temperatures save costs over swings in temperatures. The programmable feature also offers comfort for the majority of employees. (Yes, some personnel may have to make some changes in their wardrobe choices.) Add New lighting and Motion sensors for lighting. If no one is in the room, the lights won’t be left on. There are also rebates available through your electrical service company for these changes. The payback often is less than one year.

Maintenance and Repairs
Preventative Maintenance of Heating, Ventilation and Air Conditioning (HVAC) such as checking systems and changing filters can make a big difference in your actual utility billings and the need for replacement of the HAVC system. It is recommended to change filters: 1-2
times per year; 3-4 times per year if there is a lot of debris or pollen circulating in the air.

Lawn Care, Snow Removal and Janitorial Services
Shop 3-5 vendors annually. With varying gas prices, snow, rainfall and new companies coming on the scene, this keeps your vendors sharp and expenses in line.

Recycling reduces trash removal costs due to less hauling away of dumpsters.

Curb Appeal Matters!
For best property performance to attract customers, tenants or purchasers the building and surroundings need to be maintained. Like the old axiom: “Pay now, or pay later, but you will pay”.

*Regular carpet cleaning, 1 to 2 times per year, increases the longevity or carpet.
*Window Cleaning is a relatively inexpensive way to improve the appearance, especially glass doors and windows near entrances.
*At a minimum, remove cobwebs and debris from the common areas. Removing weeds, dead and overgrown landscaping quickly freshens the appearance.
*Re-striping the parking lot in the spring is inexpensive and is attractive to guests.

Vacant Buildings
Proper winterizing for HVAC, plumbing, irrigation and fire suppression is mandatory. If not taken care of, the problems begin of broken pipes, flooding, carpet and wall damage and replacement of HVAC.
Be sure to make sure the insurance is up to date. There are many stories and examples where vacant buildings have been ignored and then the issues become top priority for several days with unexpected high expenses.
Weekly walk-through’s of the space aids in minimizing vandalism and can catch small problems before they turn into big expenses.

Questions about Operating Expenses? Feel free to contact olgahallstedt@bhhsmi.com.